Australia’s Defense Investment Strategy: Balancing Long-Term Capability Development with Near-Term Readiness

The Albanese government has structured Australia’s defense policy around a strategic choice: prioritize long-term capability acquisition, particularly the AUKUS nuclear submarine program, while managing near-term spending growth through reallocation within the existing budget.

This approach, outlined in the 2023 Defence Strategic Review and subsequent budgets, reflects the judgment that Australia’s most critical defense requirements will materialize in the 2030s and beyond, when these future capabilities become operational.

The data reveals the implications of this strategy with considerable clarity.

While government communications emphasize record defense investment, the underlying financial picture is more constrained. Between 2023-24 and 2025-26, core defense funding declined in real terms when excluding compensation for foreign exchange movements—dropping from $154.0 billion to $152.5 billion.

The 2025-26 defense budget increased nominally by 4.2 percent to approximately $59 billion, but real growth after accounting for inflation was limited to 1.0 percent. This means Australia’s defense purchasing power is essentially stable during a period when government assessments describe the strategic environment as increasingly challenging.

Historical projections provide additional context. The 2016 Defence White Paper projected defense spending would reach 2.21 percent or potentially 2.39 percent of GDP by 2025-26. Current spending stands at 2.05 percent of GDP—a gap representing billions of dollars in foregone acquisition and sustainment capacity for the Australian Defence Force.

The government has allocated an additional $30.5 billion for defense from 2027-28 to 2032-33, projecting spending will reach 2.3 percent or higher of GDP by the mid-2030s. However, this remains aspirational planning rather than current appropriation. The operational question centers on Australia’s defense capability during the intervening years, particularly as potential threats evolve in real time rather than on the timeline these investments assume.

The 2023 Defence Strategic Review adopted a strategy of internal reallocation rather than substantial new appropriations. Of the initial AUD 19 billion allocated for DSR implementation, AUD 12 billion came from the existing defense budget, and approximately AUD 7.8 billion was generated through reductions to previously committed projects.

The specific capability adjustments include:

• The Army’s Infantry Fighting Vehicle program was reduced from 450 vehicles to 129—a decrease of more than 70 percent. Plans for a second Artillery Regiment equipped with self-propelled howitzers were cancelled.
• The Air Force’s MQ-9B Sky Guardian remotely piloted aircraft program was terminated.
• The Navy’s planned fleet of Hunter-class frigates was reduced from nine to six, and Arafura-class offshore patrol vessels from twelve to six.

These represent substantial changes to force structure. The stated rationale was that these programs no longer aligned with Australia’s strategic requirements. However, the budgetary reality is that resources were needed for other priorities. New DSR programs such as long-range strike capability and hardening of northern Australian bases are being funded through savings from other programs rather than new appropriations.

Defense analyst Marcus Hellyer noted that very little of the $50.3 billion announced for the decade is being spent in the early years. The government is effectively banking on future budgets to deliver the bulk of new capability funding while using current budgets to finance that future through present capability reductions.

The AUKUS nuclear-powered submarine program sits at the center of Australia’s budgetary pressures, a capability that won’t deliver operational boats until the 2030s but is consuming an expanding share of the defense budget. Nuclear submarine spending increased from $475 million in the previous year to an estimated $2.8 billion in 2024-25, with projections showing further increases to $2.75 billion in 2025-26, $1.25 billion in 2026-27, and then a substantial increase to $4.97 billion by 2027-28.

The total over the forward estimates period exceeds $12 billion for a capability Australia won’t see for most of a decade. Meanwhile, the 2024-25 submarine program spending was revised downward from the projected $2.8 billion to $2.3 billion, a reduction of nearly half a billion dollars despite the government’s commitment to the program.

This concentration of resources creates what defense experts describe as budget pressure on conventional forces as submarine costs increase. Former Australian Army Major General Mick Ryan observed that spending below 3 percent of GDP makes it challenging to adequately fund both AUKUS submarines and conventional forces.

Beyond budget allocation lies a more fundamental challenge: modern defense technology evolves through operational use, not static development timelines. This is particularly acute for software-enabled platforms and emerging autonomous systems.

Contemporary military capabilities increasingly depend on software that must be continuously refined through real-world deployment. Fifth-generation aircraft, unmanned systems, and network-centric warfare platforms all require iterative development informed by operational feedback. When force structure is reduced before these systems are fielded, the military loses the operational learning environment necessary for capability maturation.

The cancellation of programs like the MQ-9B Sky Guardian remotely piloted aircraft illustrates this dynamic. While the decision may have been justified on technical grounds, it also eliminates the operational experience base that would inform development of future autonomous systems. Australia’s defense strategy emphasizes autonomous capabilities, yet the force structure cuts reduce opportunities for the ADF to develop the operational concepts, training pipelines, and maintenance infrastructure these systems require.

Similarly, the dramatic reduction in Infantry Fighting Vehicles from 450 to just 129 limits not only Army force structure but also the service’s ability to develop and refine the tactics, techniques, and procedures for combined arms operations in littoral environments. Modern military capability isn’t simply about procuring platforms; it’s about building operational knowledge through sustained use.

This creates a temporal paradox in capability development: the future force being prioritized will operate in ways fundamentally different from current practice, yet the reduced current force limits opportunities to develop the operational knowledge base the future force will require. Software-defined capabilities evolve through use; without adequate platforms in service today, the learning curve for tomorrow’s capabilities steepens considerably.

Beyond headline program changes, there are indicators of pressure on current capabilities. Personnel costs exceeded estimates by approximately $1 billion in 2023-24, likely reflecting cost-of-living adjustments—resources that necessarily came from other budget lines. Capability acquisition spending came in more than $2 billion less than estimated, suggesting procurement adjustments as the new Integrated Investment Program was formulated.

The Navy’s operational readiness metrics are particularly noteworthy. The target for Unit Availability Days for major combatants (frigates, destroyers, and submarines) was revised substantially downward in 2024-25, from 3,294 days to 2,420 days. This represents a significant reduction in the number of days Australia’s major warships are available for operations.

The Army faces force structure uncertainty following deep reductions to land capability programs. The acquisition of just 129 Infantry Fighting Vehicles down from 450 provides barely enough to adequately equip a single brigade, fundamentally constraining the Army’s options for force employment and operational concept development.

The government’s approach centers on the concept of a focused force, transitioning from a balanced force designed to respond to diverse contingencies, toward a force optimized for high-intensity conflict with a major power, primarily in Australia’s maritime approaches. The DSR argues this requires emphasizing long-range strike, underwater capabilities, northern base infrastructure, and eventually nuclear-powered submarines—even if this creates capability gaps elsewhere.

This argument has strategic logic. Australia cannot afford universal coverage, and attempting to maintain capabilities for every contingency dilutes resources. Prioritization is essential, and the shift toward long-range maritime strike and denial capabilities reflects analysis of where Australia’s strategic vulnerabilities lie in an era of renewed great power competition.

However, this logic assumes the transition period or that the years between now and when these new capabilities arrive remains relatively stable. If major conflict occurs before AUKUS submarines are delivered, before northern bases are fully hardened, and before long-range strike systems are fully integrated, Australia would face that conflict with a force that has been deliberately reduced and reoriented but not yet equipped with the capabilities that reorientation was designed to deliver.

Moreover, the reduced current force limits the developmental pathway for future capabilities. The operational knowledge, tactics, and supporting infrastructure for tomorrow’s autonomous systems and software-enabled platforms must be built through today’s operations—operations increasingly constrained by reduced force structure.

Australia’s approach contrasts with trends elsewhere in the Indo-Pacific and among Western allies. During the June 2025 Shangri-La Dialogue, U.S. Defense Secretary Pete Hegseth explicitly called on Australia to increase defense spending to 3.5 percent of GDP, indicating U.S. assessment that the current trajectory may be insufficient for the strategic environment.

Taiwan is moving toward spending over 3 percent of GDP on defense. Japan and New Zealand plan to reach 2 percent this decade, representing substantial increases from their historical baselines. South Korea’s defense budget, around 2.3 percent of GDP, has grown by more than a third in real terms in less than a decade. European nations, responding to the Russian invasion of Ukraine, have undertaken significant defense spending increases.

Australia, meanwhile, projects reaching 2.3 percent of GDP by 2033-34—a full decade away. Even this projection is uncertain, as previous projections have consistently failed to materialize.

The fundamental question raised by Australia’s defense policy is one of timing and risk. The DSR itself acknowledged that preparation time for potential conflict is reducing and established three planning periods: 2023-2025 (immediate), 2026-2030 (near-term), and 2031 onwards (long-term). Yet the bulk of capability investment is concentrated in the latter two periods, particularly 2031 onwards when AUKUS submarines begin arriving.

This timeline assumes strategic warning time sufficient for planned capability delivery. China’s military development continues, tensions over Taiwan persist, and Australia’s own defense officials describe the current strategic environment as unprecedented. The question becomes whether strategic developments will align with Australia’s capability delivery timeline.

The sustainment funding picture reinforces these temporal concerns. The 2025-26 budget showed little change to sustainment funding, usage and workforce from the previous year, with the largest increases tied to F-35 and Collins-class submarine sustainment. This suggests the current force is being maintained at existing readiness levels while force structure is simultaneously being reduced.

The data demonstrates that the Albanese government has chosen to prioritize long-term capability acquisition over near-term force expansion and development. Rather than substantially raising overall defense spending to fund programs like AUKUS while maintaining current capabilities, the government is funding long-term programs through internal reallocation, program reductions, and constrained real growth in defense spending.

The budget numbers reflect this choice: real budget growth of 1.0 percent annually, core funding declining from $154 billion to $152.5 billion over two years, $7.8 billion in capability adjustments to fund new priorities, and defense spending at 2.0-2.05 percent of GDP when previous projections indicated substantially higher levels.

This approach reflects difficult choices about resource allocation and the political challenges of requesting greater defense investment during periods of domestic economic pressure. The focused force concept has intellectual merit, and AUKUS submarines may indeed prove valuable for Australia’s defense posture in the 2040s and beyond.

However, the strategy involves measurable risks. It assumes Australia can navigate the 2020s and early 2030s with a deliberately reduced conventional force, and that the capabilities being reduced today won’t be required before their planned replacements arrive. It also assumes that future force capabilities can mature without the operational learning base that today’s reduced force structure increasingly limits.

The technology evolution challenge is particularly significant. Modern defense capabilities, especially software-enabled platforms and autonomous systems, require iterative development through operational use. When force structure is reduced before new systems are fielded, the military loses the operational environment necessary for capability maturation. The future force being prioritized will operate in fundamentally new ways, yet the reduced current force constrains opportunities to develop the operational knowledge base those future capabilities will require.

Whether this strategy succeeds will depend substantially on factors beyond Canberra’s control: notably the spill over from the global war in Ukraine and the trajectory of policies adopted by Global China as they subordinate Russia to their agenda and maneuver with Europe and the United States with regard to the reshaping of the global system,

If the strategy succeeds, Australia will emerge in the 2030s with a modern force optimized for maritime operations.

If timing proves unfavorable, if major conflict comes before that transition is complete, or if reduced operational experience hampers future capability development, Australia may find itself with both reduced current capabilities and future systems that haven’t fully matured through operational use.

That is the strategic choice embedded in the budget numbers and the risk Australia has accepted.